Tax dispute resolution system in India and alternate dispute resolution

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Tax dispute resolution system in India and alternate dispute resolution Stein Auditorium, India Habitat Center, Lodi Road, New Delhi 16th January, 2016

Transcript of Tax dispute resolution system in India and alternate dispute resolution

Page 1: Tax dispute resolution system in India and alternate dispute resolution

Tax dispute resolution system in India and alternate dispute

resolution

Stein Auditorium, India Habitat Center, Lodi Road, New Delhi 16th January, 2016

Page 2: Tax dispute resolution system in India and alternate dispute resolution

CONTENTS

• Tax litigation in India • Some statistics • Drivers of tax litigation • Challenges for taxpayers and judiciary • Dispute resolution forums and their efficacy • ITAT – most effective dispute resolution forum • Third proviso to Section 254(2A) of the Act • CIT(A) – losing relevance as first appellate authority • DRP – is it serving the purpose? • Alternate dispute resolution

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TAX LITIGATION IN INDIA

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LITIGATION IN INDIA – SOME STATISTICS

• Over 20 million cases (including Tax cases) pending before Courts across India (as on January 14, 2016)

• 41 percent cases - over 2 years old

Pendency of Cases in India*

SC – 61,300

HC – 4 million

Lower Courts – 16.5 million

*Source: National Judicial Data Grid

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TAX LITIGATION IN INDIA – SOME STATISTICS

• An estimated INR 4 lakh crore of tax revenue locked up in litigation before Courts and Appellate Authorities (Finance Minister, Mr. Arun Jaitley in budget speech 2014-15)

Cases pending at various levels

DIRECT TAX

pendency of cases* (as on March, 2014)

Amount locked up in crores* (INR)

ITAT 35,266 1,43,255

HC 35,696 33,128

SC 5,960 3,202

*Source: Department of Revenue, Report No. 3 of 2015 ** Source: Ministry of Finance, Department of Revenue, Annual Report 2014-15

INDIRECT TAX

pendency of cases** (as

on Oct, 2014)

Amount locked up in crores**

(INR)

ITAT 71,752 131,380

HC 15,134 20,045

SC 3,490 11,923

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TRANSFER PRICING DISPUTE IN INDIA

• Around 70 percent of all TP disputes globally are in India; though global trade in India accounts for less than 2 %

• In FY 2014-15, TP audits completed were at 4290, of which, 2353 (i.e. 55%) resulted in an adjustment of INR 46,466 crores.

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SOME DRIVERS OF TAX LITIGATION IN INDIA

Complex laws and multifarious amendments with limited subordinate

legislation

Complex, disparate disclosure

requirements

Procedural complexities /

Unchanged administrative

court procedures

Overzealous Tax administration

Target led approach of administration

Alert media reporting – tax

activism

Inadequate dispute resolution and

settlement forums

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CHALLENGES OF TAXPAYER AND JUDICIARY

• Aggressive approach of revenue

administration • Inadequate commentary / regulations to

resolve conventional tax disputes and nascent issues

• Benefit of doubt not with the taxpayer • Dissenting judgments of multi-state appellate

forums • Inadequate jurisprudence on interpretation of

treaty laws and new regulations • Multiple appellate levels – protracted litigation • Identified industries are targets • Nascent regulations (TP, APA, etc) • Stay of demand • Retrospective amendments – heightened

sense of uncertainty

• Lacking infrastructure leading to administrative

delays • Frequent adjournments on trivial grounds • Increase in frivolous litigation, writs and SLPs • lack of qualitative analysis • Judicial propriety/ dissenting judicial views • Lack of consistency in jurisprudence

Taxpayer Judiciary

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DISPUTE RESOLUTION FORUMS AND THEIR EFFICACY

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ITAT – MOST EFFECTIVE DISPUTE RESOLUTION FORUM*

Contributing factors

• True specialists only at ITAT level – complex legislation leading to need for experts

• Appointment of judicial member same as a HC judge

• Accountant members selected amongst senior officers of CIT(A) and CAs in public practice for at least 10 years

• Independent of tax administration - no Government interference in selection, transfers, posting and day to day working

• Not bound by procedural technicalities applicable to Civil Courts

• In majority of cases, disputes reach finality at the ITAT stage**

72.98% cases from 1984-85 to1997-98 reached finality at ITAT stage - either reference to HC was not sought or was declined

Out of balance cases, only 3.85% of ITAT orders were interfered with

*said noted Mr. N A Palkivala **Source: The Indian Income Tax Appellate Tribunal (ITAT): A success story from the South; Article by Vimal Gandhi, President, ITAT and Pramod Kumar, member ITAT

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ITAT – MOST EFFECTIVE DISPUTE RESOLUTION FORUM

First effective forum to:

• Take an independent view

• Pass speaking, comprehensive and well reasoned orders

• Lacking functioning / efficacy of AAR, CIT(A) and DRP

Some statistics:

Particulars* FY 2011-12

Appeals filed by Department and cases decided by ITAT in favor of Department 19%

Appeals filed by taxpayer and cases decided by ITAT in favor of Department 35%

Institution Disposal Pendency

16,131 5,247 31,914

Flash figures of appeals before ITAT till April 1, 2014**:

*Source: Ministry of Finance, Department of Revenue, Annual Report 2013-14 **Source: Ministry of Finance, Department of Revenue

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ITAT – KEY CHALLENGES

• Too many appeals – over burdened

• Adjournments – varying conventions, delays

• Technicalities – impede substantial pleadings

• Lack of specialised benches

• Dissenting rulings – cohesion and consistent interpretation

• Frequent rotation of bench members – learning and relearning on cases

• Inadequate infrastructure

• Non-availability of DRs

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ITAT – REVITALISING THE SYSTEM

For quicker disposal • Create specialized benches at all locations – for TP, international tax and

repetitive dispute areas of law • Cohesive and consistent decision making • Limit adjournments – shortening the period, mandatory pre-filing for

adjournment • Setting time for disposal of appeals – internal strictures • Schedule early listing – adhere to time • Strengthening administrative support for bench members Technology support • Create online database of records • E-filing of appeals and paper-books

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Third proviso to Section 254(2A) of the Act Restricts power of ITAT to stay tax demand beyond a 365-day period

Provision challenged before Delhi HC as “unconstitutional”

Main argument - proviso renders Appeal mechanism “illusory remedy”

Delhi HC in Pepsi Foods Pvt. Ltd* struck down proviso as “unconstitutional”:

Provision restricting stay to 365 days, even where delay not attributable to taxpayer, is discriminatory and violative of Article 14

“Well-behaved” taxpayer cannot be clubbed with those that resorted to dilatory tactics; Both classes cannot face same consequences

Also examined decision of SC in ITO vs M K Mohammed Kunhi - power to grant stay by Tribunal is incidental /ancillary to its appellate jurisdiction

Impact of the Ruling

Clears air – earlier different practices being followed by various Tribunals

Of no consequence where delay is on account of Taxpayer

*Pepsico India Holding Pvt Ltd vs ACIT (WP(C) 1334/2015 & CM 2337/2015)

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CIT(A) – losing relevance as first appellate authority

In 80’s, over 80% of cases decided in favour of assessee!

Delays

• Impending delays – approx. 75%* of cases pending

• Statutory time line not adhered to

• Frequent adjournments

• Frequent transfers – learning and relearning on cases

• Remand reports

Merit based adjudication

• Pro-revenue stance –Trend of overturn

• Following judicial discipline; res judicata

• Speaking and well reasoned orders

Shortage of cadre; CBDT created over 240 new posts in Aug 2014

*Source: FICCI – Dispute Resolution in Tax Matters – Discussion Paper (March 2013)

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DRP – is it serving the purpose?

Lacking merit based approach – pro-revenue approach • Structural impediment – collegium of CITs • Proceedings quasi-judicial in nature; in practice akin to AO?

Criticised by courts for laconic / cursory orders; Cases taken up at fag end of limitation therefore not reasoned

Limited powers / scope of reference New issues • No settlement / negotiation / arbitration

• Vide Finance Act 2012, Revenue can challenge its own order adding to an extra round of litigation

• Big ticket changes to DRP mechanism – its composition, jurisdiction and control • Addresses long standing issue of dual responsibility • Ensure regular hearings / disposals, evenly spread out across the year; • Provides more time for hearings unlike cramped hearings of past

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ALTERNATE DISPUTE RESOLUTION

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NEED FOR ALTERNATE DISPUTE RESOLUTION

Concerns on administrative appeal process • Time consuming • Multi-tiers of appellate authorities • Build up of cases at ITAT level; factual nature of issues resulting in matter being

remanded back • Uncertainty on eventual outcome Experience with DRP • Structural issues in constitution of the panel • Only a ‘fast track’ to new level of litigation? • Appeal by department against DRP is unexplainable

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EXISTING FRAMEWORK FOR ALTERNATE DISPUTE RESOLUTION

Al

tern

ate

disp

ute

reso

lutio

n Authority for Advance Rulings (AAR)

Mutual Agreement Procedure (MAP)

Advance Pricing Agreements (APA)

Income tax Settlement Commission (ITSC)

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AAR

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AAR – AN OVERVIEW

The Authority for Advance Rulings • Independent quasi-judicial body; Chaired by a retired judge of the Supreme Court • Budget 2014 has proposed setting up of multi-locational benches in Metros • International tax issues from proposed or existing transactions • Applicable to resident taxpayer from October 1, 2014 for proposed or existing

transaction valuing INR 100 crore or more Why AAR?

• Binding ruling in 6 months to 1 year • Rulings can be challenged before the HC by way of a writ • Certainty • Avoidance of red tape associated with appeal process • Legalistic determination of disputes

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AAR – KEY CHALLENGES

• Restricted scope: Cannot decide on question ‘already pending’ before income tax authority or ITAT

• AAR often decides an issue before the event has happened If exact facts and circumstances differ from what was described in the application,

the answer will differ

• Delays and inconsistency in decisions – lately

• Accessibility – Only one bench located at New Delhi

• Administrative capacity and backlog of cases

• Delayed appointments of chairman and member(s) of the AAR

• Finality of AAR rulings diluted (Columbia Sportswear Co. vs DIT [2012] 346 ITR 161)

• Rulings specific to each case; persuasive but no precedential value

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MAP

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MAP – AN OVERVIEW

• Dispute resolution through interaction between Competent Authorities (CA)

• Applicable to cases where

Taxation is not in accordance with the convention

Issues on interpretation or applicability of tax treaty

Consultation on elimination of double taxation

• Taxpayer can pursue MAP along with domestic dispute process

• MAP used by taxpayer to avoid upfront deposit of tax demand

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MAP vs Appeals

Criteria MAP Appeal Process

Time frame Generally 2 to 3 years Can range from 7 to 12 years, depending upon level

Approach More scope for negotiation/compromise. CAs could agree on a ‘middle path’

Legalistic approach, no negotiations

Taxpayer involvement At the discretion of CA Significant involvement

Binding Nature Binding on Revenue; Taxpayer need not accept if detrimental, can continue with domestic tax law appeal

Binding, but sequential appeals can be made to higher judicial authorities

Double tax mitigation Possibility of avoiding double tax impact through correlative relief

Double tax exposure if appeal is against Taxpayer; uncertainty on correlative relief

Collection of taxes MOU for suspending collection of taxes (with US, UK and Denmark)

Stay of demand at discretion of Revenue & Appellate Authorities

Finality Greater chance of reaching finality, decision of CA binding on Revenue

Revenue can prefer appeal if first-level appeal is in Taxpayer’s favor

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MAP – KEY CHALLENGES

• MAP settlements are (usually) negotiated settlements and may not always be based on merits

• Ability of tax payers to depose before CAs • Back log of MAP cases, particularly with USA • Success of MAP contingent on factors (bargaining power of CA’s) • Increasing influence of domestic compulsions • Absence of prescribed timelines for closure • Agree to disagree – authority and conviction to conclude • India’s position – will not negotiate ‘pending’ Transfer Pricing disputes under

MAP, where Article 9(2) is absent in the tax treaty

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APA

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APA – AN OVERVIEW

• APA - Agreement between taxpayer and Government regarding arm’s length price / methodology

• Introduced by Finance Act 2012; first set of guidelines notified on August 31, 2012

• 146 APA applications filed in first year – approx 400 applications including second year

• 31 APAs signed till date; Of this, 22 signed last year

Types of APA Parties involved Estimated time frame for completion

Unilateral Taxpayer and tax administration 12 months

Bilateral Taxpayers, tax administration of host and home countries

18 – 24 months (depending on treaty partner)

Multilateral Taxpayers, tax administration of the host country and more than one foreign tax administrations

18 – 36 months (depending on treaty partner)

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APA – STORY SO FAR

• Transactions covered – royalty, contract R&D, software, management fees, contract manufacturing

• CBDT guidance: Team includes experts in economics, statistics, law etc

Conversion of Unilateral into Bilateral / Multilateral APA application & vice-versa – Flexible approach

Profit attribution to PE covered

• No time-lines prescribed for process / conclusion

• Confidentiality: APA information can be shared with field officers

• Bilateral APAs not available in absence of Article 9(2)

• Roll-back provision vide Finance Act, 2014; applicable to up to four past years – welcome move

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WHY APA?

Benefits of APA

• Reduces uncertainty and offers flexibility in determining ALP

• Certainty of tax treatment and alleviates concerns

• Reduces compliance cost and avoids litigation

Status:

• Virtual deadlock between Indian and US CA – signs of revival visible

• Most applications are Unilateral APA

• Not an encouraging trend for US MNEs exploring Bilateral APAs

• Issues on income characterization, PE and profit attribution – non-starters

• Significant backlog of applications

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ITSC

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ITSC – AN OVERVIEW

• Quasi-judicial body for onetime settlement for evaders or unintending defaulters

• Orders to be passed within 18 months

• Orders are final and binding on taxpayer and department

• Scope widened by Finance Act, 2014:

Taxpayer can approach ITSC where cases are pending for reassessment or where matters have been set aside by the ITAT

WHY ITSC?

• Immunity from penalty and prosecution, if the taxpayer makes full and true disclosure

• Time bound resolution of disputes and finality

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ITSC – KEY CHALLENGES

• Limited benches (only 4) leading to delays

12 to 32 months to admit applications

Only 36% disposed*

• Onetime settlement

• Withholding tax matters not covered

• Not applicable for interpretation of law and computation of Income

• Other pre-conditions :

Pre-payment of taxes

Disclosure of additional income

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DISCLAIMER: This presentation provides general information existing as at the time of preparation. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this publication will be accepted by BMR. It is recommended that professional advice be taken based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements.

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